Building Value in Canadian Construction

02/11/2014 7:00 am EST

Focus: ETFs

Tom Slee

Retired- Financial Advisor, Money Manager, Gordon Pape Enterprises LTD

 

Canada's fragile economy is limping along. The loonie has plummeted, consumers are tapped out, and exports are subsiding. It's not a pretty picture, cautions Tom Slee in Internet Wealth Builder.

Surprisingly, however, the construction sector is particularly upbeat. Researchers predict new construction investment in Canada will exceed $300 billion this year, up from $248 billion in 2013.

In the final analysis, though, mining and oil and gas-related spending is going to be crucial. This accounts for about 40% of all Canadian non-residential construction. The good news is that both industries have numerous projects underway.

Substantial work on the oil sands and supporting infrastructure continues. These are long-term undertakings, programmed out to 2021. As a matter of fact, oil sands production is expected to increase 100% over the next six years with continuing spin-off construction.

I am not suggesting that we are going to have a dramatic construction boom over the next few years. However, the industry is much healthier than a lot of people think.

Sector earnings may surprise us on the upside, and one company poised to do very well is Aecon Group (TSX:ARE) (OTC:AEGXF). Founded in Hamilton, Ontario in 1877, Aecon Group has expanded into Canada's largest and most diverse construction company.

The CN Tower, St. Lawrence Seaway, and Vancouver Sky Train are amongst its successful major projects. Foreign infrastructure developments include the Cross Israel Highway and Quito International Airport in Ecuador.

Revenues are in excess of $3 billion per annum and it looks as though 2014 operating profit will come in close to $235 million. There is a current backlog of $2.1 billion.

This, to a large extent, is a turnaround situation. As recently as 2011, things were pretty grim at Aecon Group. Gross margins were dropping sharply, profit was down more than 20% year-over-year, and the stock, at $9, hovered close to its 52-week low. A major project with Sunoco had gone sour.

Since then, however, the company has bounced back and secured a slew of major contracts. Operating margins have widened and continue to improve. New projects include a $177 million undertaking for Toronto's Eglinton Crosstown Light Rail Transit and a $60 million Enbridge terminal in Edmonton.

Because of Aecon's problems in 2011, the stock has been out of favor. Moreover, analysts remain cautious about the construction industry because our economic recovery is still uncertain and some parts of the mining industry are deeply depressed.

As a result, the shares trade at a relatively cheap 11 times this year's expected earnings. Given the company's prospects, and optimistic guidance, I think that provides a buying opportunity. Aecon Group is a Buy at C$15.48, US$13.79 with a $20 target.

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